The opinion of the court was delivered by: MCLEAN
This is an action by the Securities and Exchange Commission to enjoin defendant Sterling Precision Corporation (Sterling) from redeeming its debentures and preferred stock held by defendant Equity Corporation (Equity), and for a judgment determining that the redemption which has already occurred is void. Equity is a closed-end nondiversified investment company registered with the Commission under the Investment Company Act of 1940. At the time of the redemption in August 1966, Sterling was an "affiliated person" of Equity within the meaning of Section 2(a) (3) of the Act (15 U.S.C. § 80a-2(a) (3)). Plaintiff claims that the redemption, effected without prior approval of the Commission, violated Section 17(a) (2) of the Act (15 U.S.C. § 80a-17(a) (2)) which makes it unlawful for an affiliated person of a registered investment company "knowingly to purchase from such registered company . . . any security or other property (except securities of which the seller is the issuer)."
Plaintiff moves under Rule 12(c) for judgment on the pleadings. Defendant Sterling moves for summary judgment. The primary question is whether a redemption of securities pursuant to the terms upon which they were originally issued, is a "purchase" within the meaning of Section 17(a) (2). The facts relating to that question are undisputed.
The Act does not define the word "purchase." Webster says that it means "the acquisition of title to, or property in, anything for a price; buying for money or its equivalent." Webster, International Dictionary 2015 (2d ed. 1957).
A redemption could be said to be a purchase in this broad sense. Sterling acquired title to the debentures and the preferred stock and paid money in return. But this does not solve the problem. The question is whether a redemption is the kind of purchase which Congress intended to prohibit by Section 17(a) (2).
It is undeniable that a redemption is at best a specialized type of purchase. One does not naturally think of it as synonymous with buying. In this case the securities which Sterling redeemed were issued ten years before. The right to redeem in the future, at Sterling's option, was defined at that time. No new negotiation occurred and no new bargain was made between Sterling and Equity when in 1966 Sterling saw fit to exercise that right.
The distinction between a purchase and a redemption is well recognized in state corporation statutes, including the statutes of Delaware, where Sterling was incorporated, and those of New York, where Sterling's principal place of business is located. Del. Code Ann. tit. 8 § 243; N.Y. Bus. Corp. Law §§ 512-515.
More important, the distinction is recognized in the Investment Company Act itself. Several sections of the Act refer both to purchases and redemptions.
See Section 1(a) (1) (15 U.S.C. § 80a-1(a) (1)); Section 7(a) (2) (15 U.S.C. § 80a-7(a) (2)); Section 7(b) (2) (15 U.S.C. § 80a-7(b) (2)); Section 18(e) (2) (15 U.S.C. § 80a-18(e) (2)); Section 22 (15 U.S.C. § 80a-22).
Yet Section 17(a) (2) refers only to purchase. Where Congress has been careful to use both words when it intended to cover both types of transactions, it is hard to believe that it meant to cover both types in Section 17(a) (2), where it used only one word.
Decisions construing the word "purchase" for the purposes of Section 16(b) of the Securities Exchange Act of 1934 have been careful to restrict that word to its normal meaning. They have declined to broaden it to include a conversion of preferred stock into common stock (Petteys v. Butler, 367 F.2d 528 (8th Cir. 1966), cert. denied, 385 U.S. 1006, 87 S. Ct. 712, 17 L. Ed. 2d 545 (1967), Blau v. Max Factor & Co., 342 F.2d 304 (9th Cir. 1965), cert. denied, 382 U.S. 892, 15 L. Ed. 2d 150, 86 S. Ct. 180 (1965)); or a reclassification of stock (Roberts v. Eaton, 212 F.2d 82 (2d Cir. 1954), cert. denied, 348 U.S. 827, 99 L. Ed. 652, 75 S. Ct. 44 (1954)); or the receipt of rights (Shaw v. Dreyfus, 172 F.2d 140 (2d Cir. 1949), cert. denied, 337 U.S. 907, 93 L. Ed. 1719, 69 S. Ct. 1048 (1949)). These decisions offer some guidance here.
Plaintiff urges that the purpose of the Act is controlling. Cf. Blau v. Lamb, 363 F.2d 507 (2d Cir. 1966), cert. denied, 385 U.S. 1002, 17 L. Ed. 2d 542, 87 S. Ct. 707 (1967); Willheim v. Murchison, 342 F.2d 33, 42 (2d Cir. 1965), cert. denied, 382 U.S. 840, 15 L. Ed. 2d 82, 86 S. Ct. 36 (1965).
It may be assumed that the fundamental purpose of the statute is to prevent unsupervised dealing between an investment company and its controlled affiliate. But it does not necessarily follow that Congress intended to prevent every possible type of such dealing. Put another way, the existence of an overall benificent purpose does not necessarily require the conclusion that the word "redemption" should be read into Section 17(a) (2) where it does not in fact appear.
The unsupervised self-dealing which Congress intended to prevent would seem to be dealing of the sort which involves negotiations or bargaining between the two companies. A redemption of securities does not involve such dealing. Clearly, the dealing between the investment company and its affiliate in a redemption is minimal compared with the dealing involved in a true purchase. Actually, any dealing, in the sense of bargaining, could have occurred only when the securities were originally issued. At that time there may have been no affiliation whatever between the two companies, and hence no possibility of self-dealing, or if there was affiliation, the Commission may have approved the issuance of the securities. Indeed, that appears to be ...